What to expect from J.P. Morgan Chase earnings

J.P. Morgan Chase & Co. is expected to report first-quarter results before the market opens on Wednesday, with analysts expecting the first year-over-year earnings decline in five quarters.

The results for the nation’s biggest bank by assets comes as the overall financial sector is projected to suffer the worst quarter for earnings in nearly five years, hurt by persistently low interest rates — including negative rates in some countries — a drop in market volatility, a heavy-handed regulatory environment and continued stress in the energy markets.

On the bright side, investors have set a low bar for J.P. Morgan Chase, as the stock
JPM, +0.43%
dropped sharply during the first quarter, compared with a slight gain in the Dow Jones Industrial Average
DJIA, +0.72%
as analysts have slashed their earnings and revenue estimates over the past few months. Meanwhile, the overall financial sector has been the weakest of the 10 key S&P 500 sectors year to date.

FactSet

“Two questions that will be answered this week are whether the sharp decline in earnings estimates for financials fully capture the difficult quarter...and if poor performance of financial stocks has priced in these results,” wrote Jim Strugger, derivatives strategist at MKM Partners.

Here are some things to watch for:

Earnings: J.P. Morgan Chase is expected to report earnings per share of $1.26, according to the average estimate of analysts surveyed by FactSet, down from EPS of $1.45 in the same period a year ago. The FactSet EPS consensus for the quarter ended in March has declined sharply from $1.54 at the end of 2015.

Estimize, which surveys sell-side analysts like FactSet, but also hedge-fund executives, brokerages and buy-side analysts, is expecting EPS of $1.26, based on 713 estimates.

Stock price: Investors have been disappointed with J.P. Morgan Chase’s past two quarterly reports, even though earnings and net interest income had beat expectations. The stock fell 2% on Jan. 15 after fourth-quarter results, and 2.5% on Oct. 14 following third-quarter results.

Heading into first-quarter results, the stock has tumbled 12% year to date through Monday, compared with a 0.8% gain in the Dow and a 7.1% decline in the SPDR Financial Select Sector exchange-traded fund
XLF, +0.21%

The average rating of the 26 analysts taking part in a FactSet survey is the equivalent of overweight, and the average stock price target of $70.04 is 20% above current levels.

Other issues: The lack of market volatility is expected to have a big negative effect on J.P. Morgan Chase’s trading business. Overall, core trading revenue is expected to decline 17% to $4.25 billion, according to analysts at Keefe, Bruyette & Woods, with fixed income, currency and commodities-trading revenue dropping 19% to $3.06 billion, and equities-trading revenue falling 12% to $1.19 billion.

“We expect that trading results in the first quarter will show that the poor trading environment that plagued the second half of 2015 continued into 2016,” analysts at Keefe, Bruyette & Woods wrote in a note to clients. They believe the overall sector will post the worst quarterly trading revenue since the financial crisis.

Another area of focus for investors is likely to be how J.P. Morgan Chase was affected by the weak commodities markets. The company expects a first-quarter reserve build of about $500 million for its exposure to oil and gas markets, with all of that assumed to be against noninvestment-grade debt, according to analyst Matt O’Connor at Deutsche Bank.

“If oil stays at $25 per barrel for a period of 18 months, [management] would expect reserve builds of up to [about] $1.5 billion,” O’Connor wrote in a note to clients.

Among other key metrics to watch, with expectations based on estimates provided by Deutsche Bank:

• Asset management income is expected to slip to $2.26 billion from $2.38 billion.

• Investment banking income is expected to drop to $1.35 billion from $1.76 billion.

• Card income is expected to fall to $999 million from $1.32 billion.

• Mortgage banking income is expected to slide to $462 million from $704 million.

• Commercial banking income is seen ease to $605 million from $636 million.

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